Budget 2018 enough to delay a Moody’s downgrade – FNB chief economist

FNB chief economist Mamello Matikinca said on Thursday she was confident the 2018 budget unveiled by finance minister Malusi Gigaba would be enough to avert a credit rating downgrade by Moody’s next month.

In his budget speech to parliament on Wednesday, Gigaba announced a raft of tax reforms including a one percentage point increase to 15 percent in value-added tax (VAT) as part of raising an additional R36 billion in revenue.

Gigaba also announced R26.4 billion in expenditure cuts for this financial year while allocating R12.4 billion for fee-free higher education in 2018/19. He assured markets that government was in talks with the mining industry to resolve the impasse around controversial mining policy and legislation.

Moody’s, which is set to review South Africa’s credit rating in March, had already said on Monday that a resolution of the issues around the mining charter would be credit positive for South African mining houses like AngloGold Ashanti, Gold Fields and Sibanye Gold.

Matikinca said the reforms announced by Gigaba should be enough to delay a Moody’s downgrade for now, but that action on structural reform was needed before mid-year reviews to stave off a downgrade completely.

“The budget has put government finances back on a trajectory that attempts to consolidate the fiscal position over the next few years. We believe it will be enough to delay a downgrade by Moody’s next month,” Matikinca said.

“However, we are concerned by the drastic shift in expenditure which now leans more to consumption rather than capital expenditure. If maintained the government could potentially be setting its self-up for further downgrades down the line.”

She said very little detail about structural reform was evident in the budget, but noted that such policies were not part of National Treasury’s mandate. Lifting structural constraints would require policy responses that involved all state departments and align the country’s policy trajectory with that of its National Development Plan.

Matikinca said with an increased tax burden, it was vital that reforms which lift growth meaningfully are hastily implemented.

Gigaba’s budget was applauded by the ruling party and the business sector, but strongly criticized by opposition parties and trade unions, particularly the first increase in VAT in 25 years.